- Tiago Figueiredo
Macro Strategist
Essentials of Monetary Policy
European Central Bank Cuts Rates Again as Global Uncertainty Rises
January 30, 2025
According to the European Central Bank (ECB)
- The ECB lowered its policy interest rate from 3.00% to 2.75%, in line with expectations.
- The accompanying statement emphasized progress on inflation, with most measures of underlying inflation around the target. On growth, risks remain skewed to the downside, particularly considering trade tensions, which could further weigh on euro area exports.
- The market continues to see further easing from the ECB, with expectations for the policy rate to fall to 2.00% this year.
Implications
The direction of travel for the ECB’s policy rate is clear. Rates are headed lower. The focus for the coming meeting will shift towards the central bank’s estimate of its neutral rate. Markets are pricing in a 2.00% terminal rate, which is within the range President Lagarde has hinted at in the past. While Lagarde didn’t offer much on whether the central bank will need to lower rates below neutral, an escalation of trade tensions would likely increase the need for more stimulative policy. We continue to expect that the ECB reduce its policy rate to 2.00% by the end of this year.